How To Conduct a Financial Checkup

Here's a simple system for assessing your fiscal fitness

Many experts suggest that people make a point of conducting a personal financial checkup on an annual basis or after a major life event (such as a marriage, divorce, birth, or death). The question is, what does that mean exactly?

To make sure you don’t miss something critical to your financial well-being, here are the main topics you should plan to cover.

Key Takeaways

  • A financial checkup is a systematic look at the complete state of your finances.
  • It can be useful to perform a financial checkup annually and after any major life event, such as a marriage, divorce, birth, or death.
  • Your checkup should include your retirement accounts and other savings, your debts, your estate plan, and your insurance coverage, among other topics.

Review Your Life Changes

To begin with, review any major changes in your life that have taken place since your last financial checkup. Have you changed jobs, gotten married or divorced, welcomed a new family member, received an inheritance, bought a home, moved, or retired?

Each of these life events can alter your overall financial picture. As you go through the sections below, consider how any recent life changes could affect your plans moving forward.

Set or Reset Financial Goals

Building an adequate retirement fund is one example of a financial goal. Others include creating an emergency fund, saving up for a down payment on a car or home, starting your own business, or anything else that requires money you don't already have.

Evaluate your progress toward your financial goals and adjust as needed. Once you achieve a goal, cross it off the list and replace it with another.

Sketch Out a Budget

Your budget is a blueprint for handling your income and expenses on a recurring basis. A budget should be monitored and adjusted as needed.

The idea is to make sure you have enough income to cover all your usual expenses, with some extra set aside for your longer-term financial goals. You can maintain your budget with pencil and paper, a computer spreadsheet, or one of the many available free or inexpensive budgeting software programs.

Assess Your Debt

Review your progress in paying down all debt, including loans and credit cards. If your debt is rising, especially high-interest credit card debt, it might be time to adjust your spending so that those balances start to decline again.

Two popular ways to reduce debt are the snowball method and the avalanche method. Evaluate interest rates on everything from your mortgage to your car loan to credit cards. Consider refinancing loans or switching to another credit card with a lower rate.

Federal law entitles you to one free credit report annually from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion.

Check Your Credit Reports

Each of the three main credit reporting agencies (Equifax, Experian, and TransUnion) are required by federal law to provide you with a free copy of your credit report each year. You can obtain your reports at the official website for that purpose,

Check for errors and report any you find immediately. Credit reporting agencies are not required to provide you with a free credit score, but you can obtain yours for a reasonable fee. Some banks provide free credit scores; however, not all are official FICO scores, the type most widely used by lenders. If necessary, begin to take steps to improve your credit score.

Revisit Your Retirement Savings

As part of your financial checkup, you'll also want to evaluate your contributions to your company 401(k) plan, if you have one. Make sure you are contributing at least enough to get any employer match.

If you've already maxed out your contributions, consider opening up a traditional or Roth IRA. This could also be a good time to rebalance your portfolio as needed. In general, the closer you are to retirement, the less risk you should be taking with your money. Many 401(k) plans offer target-date funds that automatically adjust your risk exposure over time.

10% to 20%

The amount of your pretax income that many experts suggest should be earmarked for retirement savings.

Consider Your Other Savings Goals

Review your progress toward any other savings goals, such as an emergency fund, a college savings fund (such as a 529 plan), a new-car fund, or a vacation fund. If you had to dip into your emergency fund for home or car repairs recently, aim to replace that money as quickly as possible.

In addition, check available interest rates to make sure your savings are earning a reasonable return. You might want to investigate high-yield savings accounts, for example.

Make Sure You're Properly Insured

Your insurance needs can change over time. You'll want to make sure you have an appropriate amount of life insurance, disability insurance (for income protection), and homeowners or renter's insurance, including flood insurance, if appropriate for your location.

Reevaluate your health insurance needs, including long-term care (LTC) insurance if you think you might need it. Consider switching insurance companies or raising deductibles on home and auto policies to lower premiums. You can also save money by bundling multiple policies with one company.

Evaluate Your Estate Plan

Even if your assets are relatively modest, you should have a plan for what would happen to them if you were to die. Review your will or trust to make sure you're happy with your choice of executor or trustee and anyone to whom you've granted power of attorney.

Review beneficiaries and allocations to make sure they match your current wishes. Assess your living will or other advance directives. If necessary, engage an estate planning attorney to make sure you follow all applicable state and federal laws with any changes you make.

And Don't Forget Taxes

The Internal Revenue Service (IRS) has an online tax withholding estimator you can use to make sure you're having the right amount withheld from your paycheck. If you are self-employed (even part-time) or receive other income that doesn't have taxes withheld, such as a pension, you'll want to be sure you're making adequate quarterly estimated tax payments. This will keep you from facing a big bill—and possible underpayment penalties—when you file your tax return for the year.

You may want to schedule a meeting with a tax advisor as part of your financial checkup to plan a tax strategy.

What Is a Financial Checkup?

A financial checkup looks at the current state of your finances to determine what kind of shape they are in and whether you need to make any changes in how you're handling them to stay on track.

When Do I Need a Financial Checkup?

Experts suggest conducting a financial checkup on an annual basis or after major life events, such as a marriage, divorce, birth, or death.

Can I Do a Financial Checkup by Myself?

If your finances aren't particularly complicated, you should be able to perform a financial checkup on your own. However, the more complex your financial life is, the more likely that you'll benefit by engaging a financial planner or other experts to assist you.

The Bottom Line

A financial checkup can help keep you on track toward your financial goals. After completing your checkup, you'll want to begin implementing any changes you've decided to make as soon as practical. Then you'll be able to relax until it's time to do it all over again.

Article Sources
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  1. U.S. Federal Trade Commission. "Free Credit Reports."

  2. IRS. "Tax Withholding Estimator."

  3. Internal Revenue Service. "Topic No. 306 – Penalty for Underpayment of Estimated Tax."

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